Roach v. Comptroller of the Treasury

ELDRIDGE, Judge. Maryland Code (1988), § 10-703(a) of the Tax-General Article, provides, with certain exceptions not here relevant, that “an individual may claim a credit only against the State income tax for a taxable year in the amount determined under subsection (c) of this section for tax on income paid to another state for the year.” (Emphasis added). This appeal presents the question of whether the District of Columbia’s tax on unincorporated businesses, D.C.Code Ann. § 47-1808.1 through § 47-1080.7 (1981, 1990 Repl. Vol.), is a “tax on income” under the above-quoted Maryland statute so that the taxpayers in this case are entitled to claim a credit against their Maryland income taxes.

The pertinent facts of this case are not in dispute. The taxpayers, Edward F. Roach and his wife, Josephine D. Roach, are residents of Annapolis, Maryland. Mr. Roach, during the 1986 tax year, was a 50% owner of a District of Columbia partnership called Roach & Seagraves. Pursuant to § 47-1808.1 of the D.C.Code, Mr. Roach paid taxes to the District of Columbia on income he realized through the partnership.

On their 1986 joint Maryland income tax return, pursuant to § 10-703 of the Tax-General Article of ⁴⁴⁰ the Maryland Code, the Roaches claimed as a credit against their Maryland income tax the amount of the tax on income paid to the District of Columbia. The Maryland Comptroller, however, disallowed the credit, and entered an assessment against the Roaches for unpaid tax, interest and penalties. The Maryland Tax Court upheld the Comptroller’s assessment solely on the basis of this Court’s decision in Gardella v. Comptroller, 213 Md. 1 , 130 A.2d 752 (1957). Upon the Roaches’ action for judicial review, the Circuit Court for Anne Arundel County affirmed the Tax Court’s decision, also relying entirely upon Gardella .

The Roaches appealed, and this Court issued a writ of certiorari prior to argument in the Court of Special Appeals. Title 47, Ch. 18, subchapter VIII of the D.C.Code, comprising §§ 47-1801.1 through 47-1808.7, originally enacted by the District of Columbia Council as part of the Revenue Act of 1975, 1 entitled “Tax on Unincorporated Businesses,” provides in relevant part as follows: “§ 47-1808.1. Tax on unincorporated businesses—Definition. “For the purposes of this chapter (not alone of this subehapter) and unless otherwise required by the context, the words ‘unincorporated business’ mean any trade or business, conducted or engaged in by any individual, whether resident or nonresident, statutory or common-law trust, estate, partnership, or limited or special partnership, society, association, executor, administrator, receiver, trustee, liquidator, conservator, committee assignee, or by any other entity or fiduciary, other than a trade or business conducted or engaged in by any corporation and include any trade or business which if conducted or ⁴⁴¹ engaged in by a corporation would be taxable under subchapter VII of this chapter---- ****** “§ 47-1808.2. Same—Definitions. “For purposes of this subchapter, the words: (1) ‘Taxable income’ mean the amount of net income derived from sources within the District____” ****** “§ 47-1808.3.

Same—Levy and rates. “(a) Except as exempted under subchapter II of this chapter, for the privilege of carrying on or engaging in any trade or business within the District and of receiving income from sources within the District, there is levied: (1) For 1 taxable year beginning after December 31, 1974, a tax at the rate of 12 per centum upon the taxable income of every unincorporated business, whether domestic or foreign; (2) For the taxable years beginning after December 31, 1975, a tax at the rate of 9 per centum upon the taxable income of every unincorporated business, whether domestic or foreign, except that, effective October 1, 1984, the rate of tax shall be 10 per centum upon the taxable income for any taxable period; and (3) A surtax on the tax determined under paragraph (2) of this subsection at the following rates ****** “§ 47-1808.5. Same—Persons liable for payment. “The taxes imposed by § 47-1808.3 shall be payable by the person or persons, jointly and severally, conducting the unincorporated business. The taxes imposed under this subchapter may be assessed in the name of the unincorporated business or in the name or names of the person or persons liable for the payment of such taxes, or both.” Thus, the tax imposed by the above-quoted statutory provisions applies to partnerships, and an individual partner is liable for the tax. The tax is a percentage of “taxable ⁴⁴² income” which is defined as “net income derived from sources within the District.” In Gardella v. Comptroller, supra, 213 Md. 1 , 130 A.2d 752 , this Court examined a prior District of Columbia unincorporated business tax which was substantially similar to the present tax on unincorporated businesses.

Our predecessors concluded in Gardella that the tax was a franchise tax and not an income tax and that, therefore, a Maryland taxpayer, who was a partner in a District of Columbia business, was not entitled to a credit against his Maryland income tax for the tax paid to the District of Columbia. The Gardella opinion relied upon the District of Columbia’s characterization of the tax, set forth in the statutory language, as a “franchise tax” which is “imposed on the privilege of carrying on and engaging in a trade or business in the District of Columbia and of receiving income from sources within said District____” Gardella v. Comptroller, supra, 213 Md. at 4 , 130 A.2d at 753 . The Court in Gardella stated that, while a jurisdiction’s “declaration that a tax shall be of a particular character does not make it such, nevertheless, the declaration of the law making power is entitled to much and respectful weight.” Ibid. Although acknowledging that the tax was imposed on “taxable income,” the Gardella opinion concluded that merely because a franchise tax is measured by a business’s income does not make it an income tax. 213 Md. at 4-5 , 130 A.2d at 754 .

As previously indicated, the statute involved in the Gardella case was replaced by provisions of the District of Columbia Revenue Act of 1975. The subchapter of the 1975 statute imposing a tax on unincorporated businesses was before the District of Columbia Court of Appeals in Bishop v. District of Columbia, 401 A.2d 955 (D.C.App.1979), affirmed en banc, 411 A.2d 997 (D.C.App.), cert. denied, 446 U.S. 966 , 100 S.Ct. 2943 , 64 L.Ed.2d 825 (1980). The taxpayers in the Bishop case were a Maryland resident and a Virginia resident, both of whom practiced law in the District of Columbia. The earlier District of Columbia unincorporated business tax had contained a “professional exemption,” ⁴⁴³ but the Revenue Act of 1975 repealed the exemption, “thereby allowing the District of Columbia to impose an unincorporated business tax upon unincorporated professionals and personal service businesses.” Bishop v. District of Columbia, supra, 401 A.2d at 955 .

Congress in the District of Columbia Home Rule Act, however, had prohibited the District of Columbia Council from enacting a so-called commuter tax, i.e., an income tax on the personal income of nonresidents working in the District of Columbia. Thus D.C.Code (1978 Supp.), § l-147(a)(5), provided that “the Council shall have no authority to ****** (5) impose any tax on the whole or any portion of the personal income, either directly or at the source thereof, of any individual not a resident of the District.” The taxpayers in Bishop argued, inter alia, that the unincorporated business tax was an income tax and that, therefore, as applied to them it was invalid under the Home Rule Act. The District of Columbia government, on the other hand, insisted that the unincorporated business tax was a franchise tax, and, as such, was not precluded by the Home Rule Act. As stated by the Bishop court, 401 A.2d at 956 , “[t]he question is whether [the unincorporated business tax] imposes a tax on the personal income of nonresidents or whether the tax is levied on something other than income (e.g., the privilege of doing business in the District).” The District of Columbia Court of Appeals held in Bishop that the unincorporated business tax was an income tax and not a franchise tax.

Initially, the court stated “that the nature and effect of a tax ... determine if it is an income tax or not.” 401 A.2d at 958 , citing Dawson v. Kentucky Distilleries, 255 U.S. 288, 292 , 41 S.Ct. 272, 274 , 65 L.Ed. 638, 645 (1921). The Bishop opinion pointed out that numerous jurisdictions have “styled their tax a franchise tax only to have the courts intercede to reclassify the tax.” 401 A.2d at 959 , citing Gaulden v. Kirk, 47 So.2d 567, 574-575 (Fla.1950); State ex rel. v. Keller, 140 Fla. 346, 348-349 , 191 So. 542, 547-548 (1939); Commissioners of Sinking ⁴⁴⁴ Fund v. Howard, 248 S.W.2d 340, 342-343 (Ky.1952), aff'd, 344 U.S. 624 , 73 S.Ct. 465 , 97 L.Ed. 617 (1953); City of Louisville v. Sebree, 308 Ky. 420, 428 , 214 S.W.2d 248, 253 (1948); Carter Carburetor Corp. v. City of St. Louis, 356 Mo. 646, 658 , 203 S.W.2d 438, 440 (1947). The Court of Appeals in Bishop then emphasized that the unincorporated business tax was a tax upon the net income of the taxpayer instead of upon the gross receipts, and that the purpose and incidents of the tax were the same as those of income taxes generally and not the same as those of franchise taxes, 401 A.2d at 959-960 . The court rejected the government’s argument “that this tax is a tax on the right to earn income in the District,” because it is not levied on “any act of earning income” but only on net income, id. at 960-961 .

The court went on to point out that the federal Commissioner of Internal Revenue had consistently ruled that the tax was an income tax, that it “is levied upon personal income,” and that the individual is personally liable for the payment of the tax, id. at 961 . Concluding that the “tax, by its very terms, is a tax on net income,” id. at 960 , the court held “that the professional tax here at issue is an invalid exercise of the City Council’s legislative authority under the Home Rule Act.” Id. at 961 . In light of the Bishop case, applying this Court’s rationale in Gardella v. Comptroller, supra, 213 Md. at 4 , 130 A.2d at 753 , leads to a decision which is opposite from the result in Gardella . As previously discussed, the ruling in Gardella was based upon giving “much and respectful weight” to the District of Columbia’s “declaration that [the] tax shall be of a particular character.” The Gardella Court relied on the declaration, then set forth in the District of Columbia statutory language, that the unincorporated business tax was a “franchise tax” which is “imposed on the privilege of carrying on and engaging in a trade or business in the District of Columbia____” If, however, we follow Gardella’s approach and rely upon the District of Columbia’s characterization of its present unincorporated business tax, we take that charac ⁴⁴⁵ terization from the interpretation of the statute by the highest court of the District of Columbia. 2 While the nature of another jurisdiction’s statute for purposes of Maryland law is for this Court to decide, nevertheless, to the extent that we rely on the other jurisdiction’s characterization of its statute in deciding that issue of Maryland law, we take the statute with whatever interpretative gloss has been placed upon it by the highest court of the other jurisdiction.

This principle was set forth long ago by Chief Justice Marshall for the Supreme Court in Elmendorf v.